Article No. 205

Customer Psychology Findings, by James Larsen, Ph.D.

Price Framing and Purchase Intentions

Research explores the interactions of price framing and couponing.

Which of these choices seems more attractive:

A $20,000 automobile reduced 5%.

A $20,000 automobile reduced $1,000.

A 50 cent bottle of soda reduced 50%.

A 50 cent bottle of soda reduced 25 cents.

Executives worry about things like this. They invariably stare for long periods at blank pages destined to become print ads, moving text and images around hoping to gain the maximum effect, and price information is one element that bedevils them the most. You recognized, no doubt, in the examples listed above, that each item of the pairs was identical, yet the attraction of each differed. Gaining maximum attraction for a product is the goal for business owners, and it was also the goal of a research study conducted by Shih-Fen Chen from Kansas State University.

Chen tested these elements on a sample of 119 undergraduate business students by asking them to react to promotions for low-priced floppy disks and high-priced computers. He compared their reactions and arrived at a set of recommendations that confirm some of our current practices and offer some new insights. Here are Chen's recommendations concerning price comparisons:

For a relatively high-priced product with a small decrease in price, ads should list both the regular price and the dollar amount of the reduction.

For a relatively high-priced product with a large decrease in price, ads should list the regular price, the dollar amount of the reduction, and the percentage amount of the reduction.

For a relatively low-priced product with a large decrease in price, ads should list the regular price and the percentage amount of the reduction.

For a relatively low-priced product with a small decrease in price, Chen found three patterns that work well: 1) listing the regular price and the dollar amount of the reduction, 2) listing the regular price and the percentage amount of the reduction, and 3) combining all three elements, regular price, dollar amount, and percentage amount of the reduction in the same ad.

Chen also found interesting effects comparing coupon promotions directed at select customers with print ads directed at everyone: Coupons elicited customer attitudes of privilege and exclusivity. They enhanced the value of the discount, increased purchase intentions, and they counteracted many of the negative attitudes stimulated when discounts were offered through print ads to everyone.

Print ads elicited suspicions of retailer manipulation. Some people suspected the discount represented a decline in the regular price dressed up as a promotion. Others suspected the retailer had recently raised the regular price to an inflated level only to lower it as a promotion to its normal level. Finally, some people suspected a decline in quality which would account for the lowered price.

For the customer, the problem is one of giving meaning to the business owner's actions. Coupons for selected subgroups are more likely to be explained as an expression of gratitude by the retailer toward a valued customer. Chen believes this explains the positive results his coupon investigation revealed, and he recommends you use them.

Chen also noticed a curious effect when he examined purchase intentions. Although people clearly preferred some ads over others, this attraction usually did not affect their purchase intentions. New customers would not be buying these products, only the customers who intended to buy them anyway. The effect of the ads would be to redistribute these customers, enticing them to favor one retailer over another, and this brings to mind an old selling rule: lead with need.

Ads that emphasize price while neglecting to highlight reasons people need the products do little to encourage new customers to try them. Markets won't expand unless ads generate this interest, and isn't that the point of advertising?